2017 might be remembered as the year cryptocurrency went mainstream. The price of Bitcoin fluctuated wildly from over $17,000 down to below $10,000, several financial institutions and tech giants announced new blockchain initiatives, and interest in initial coin offerings (ICOs) grew exponentially while some governments banned them altogether.
While cryptocurrency began with Bitcoin over 10 years ago, it has now taken many different incarnations, spawning countless other competing currencies and an ecosystem of products and companies built on its underlying technology, blockchain. Most experts agree that regardless of the future of Bitcoin, blockchain will have a lasting impact on almost every industry, not least of which the payments and banking industries.
We spoke to our Director of Product Management and resident cryptocurrency expert Jeff Falk about what the rise of cryptocurrency could mean for credit unions.
Consumers are Buying Cryptocurrency With Credit Cards
The rise in popularity of Bitcoin and other cryptocurrencies has led to new exchanges and services that allow consumers to purchase cryptocurrency directly from their bank account or with their credit card. In fact Bloomberg reports that at the height of December’s Bitcoin mania, web searches for “buy bitcoin with credit card” hit an all-time high.
That could be a problem for credit unions, Falk explains. Bitcoin and other cryptocurrencies remain extremely volatile and highly speculative so purchasing it with a credit card is risky: “it would be like buying stocks with your credit card. Imagine a speculative credit union member using his line of credit to purchase a few bitcoin (currently floating around $10,000 each), then the price steeply drops or Bitcoin bottoms out completely. In addition to the loss, you’re dealing with credit card interest and fees which can outweigh any initial returns.”
Several large banks are actually beginning to prohibit their customers from using credit to buy cryptocurrency in order to insulate themselves from potential losses. Falk argues that’s not the right approach, though. Instead, credit unions should talk to and advise their customers rather than try to control their personal finances. “Be confident in your members and your underwriting. After all, you’re granting of the original credit card or line of credit was based on credit-worthiness and the relationship you have with your member.”
Cryptocurrencies Still Have a Lot of Security Concerns
Theft and fraud continues to be a challenge for cryptocurrency users. Several of the large currency exchanges have been hacked and if your cryptocurrency is taken there’s often no way to recoup that loss. Additionally, there have been instances of consumers being defrauded by ICOs. Another reason why Faulk argues that individuals need be cautious about how and where they invest in cryptocurrency.
There has also historically been the concern about cryptocurrencies being used to launder money or engage in illegal activity. On that front, Falk says, there has generally been improvement, “CO-OP has seen a low amount of activity reported as fraudulent for cryptocurrency transactions.” But he adds that it will continue to be something that CO-OP monitors.
Cryptocurrency Isn’t Going Away Anytime Soon
Despite market volatility and uncertainty about regulation, cryptocurrency is not going away anytime soon because of what it represents. “Freedom, ambiguity and the free flow of funds were the intentions of Bitcoin’s founders,” Falk says. Distrust of the larger financial institutions, who charge higher fees and offer little transparency into how they use their customers’ money should be the most concerned. However, the popularity of cryptocurrency could represent an opportunity for some credit unions. Credit unions can juxtapose themselves as more customer-centric, focused more on small businesses and individuals rather than commercial entities. They can, essentially, help restore trust to the banking and payments industries not to mention leverage some of the innovations in blockchain to improve their own operations.
Cryptocurrency is in many ways a microcosm of the larger trend of digital transformation taking place across almost every industry. Credit unions can be best prepared for the shift by understanding the dynamics behind the rise in cryptocurrency and providing guidance to their customers where they can.
“There is no question there will continue to be disruption from digital currency,” Falk adds. “The question is how much…”
Join us at THINK 18, May 7 – 10 in Chandler, Arizona to learn more about Bitcoin, blockchain and other important topics during our Power Sprint sessions.